Thursday, November 5, 2009

CPP Flexes Buyout Muscle?

The Canada Pension Plan's investment arm threw its weight behind two deals worth US$11-billion Thursday, joining forces with a U.S. buyout titan in the largest North American private-equity deal of the year, and helping to launch an unsolicited takeover bid for Australia's biggest toll-road operator.

Even though it has been initially rebuffed in its Australian foray, the moves by the Toronto-based pension fund are cementing its reputation as one of the largest and shrewdest private-equity players in the world, say people who follow the leveraged buyout field.

The deals -- a $5.2-billion bid for IMS Health Inc. with TPG Capital, and a US$6.2-billion offer for Australia's Transurban Group Ltd. in conjuction with the Ontario Teachers Pension Plan Board -- follow aggressive moves in the communications sector in which it acquired Australia's Macquarie Communications Infrastructure Group and a 15% stake in Internet telephony-provider Skype.

Mark Wiseman, head of Canada Pension Plan Investment Board's private-equity team, said the fund is "active" in the marketplace as it is capitalizing on certain advantages, among them "ample" liquidity and a first-class research team.

"We are in a unique position today," the fund's senior vice-president for private investments said. "We are looking for situations, carefully, where we can use those comparative advantages to our benefit."

The pension fund has $116-billion in assets, and reported a 7.1% rate of return for the three-month period ended on June 30.

CPPIB first surprised markets with word it had joined with TPG Capital, one of the world's leaders in private equity, to acquire IMS Health Inc. for US$5.2-billion. The two investors said they were prepared to pay US$22 a share for the Norwalk, Ct.-based company that provides prescription data to drug makers and analysts. The transaction, as structured, will be financed through equity investments from TPG and CPPIB, with Goldman Sachs & Co. providing debt financing.

Given TPG's heft, it could have partnered with a number of funds to purchase the health company. TPG was recognized this year as the world's top private-equity fund after raising US$52.3-billion in capital over the last five years, outpacing other noteworthy giants such as Carlyle Group and Kohlberg Kravis Roberts. It is noted for its success in buyout deals involving J. Crew, Burger King and Continental Airlines.

It approached CPPIB a few months ago about working on the IMS acquisition.

"TPG probably didn't want, or couldn't, speak for all of the equity on its own. And rather than calling the other usual suspects, they are partnering with CPPIB," said David Snow, New York-based executive editor of PEI Media, a firm that follows the private-equity industry. "They are calling on a group that has the money, but also the ability to execute such a deal because you have to perform the due diligence in a professional way and a short manner of time whereas most [private-equity] funds aren't equipped to do that."

Mr. Wiseman said CPPIB and TPG have a long-standing relationship, as CPPIB is an investor in some TPG funds and the two have worked together in previous transactions. Further, he added IMS was an attractive target as it is the only global player in its field, has robust cash flow and long-term contracts with clients.

Mr. Wiseman would not disclose how much equity it is contributing, although noting it would be a "significant minority" investor should the deal close. Analysts reckoned the deal was likely heavily tilted toward equity, as debt financing is difficult to obtain in this marketplace.

Meanwhile, CPPIB also moved, in conjunction with the Ontario Teachers Pension Plan Board, to table a US$6.2-billion offer for Australia's Transurban Group. Transurban said the offer was "incomplete," but was willing to discuss "bona fide proposals which provide appropriate value and certainty to [shareholders]."

Mr. Wiseman would not elaborate further beyond what is included in a joint CPPIB-Teachers statement, which said the offer represented a premium of up to 25% based on the average volume-weighted value of Transurban's shares over the last three months.

Mr. Snow said the Transurban deal in noteworthy because CPPIB is garnering a reputation as one of the world's best, and influential, investors in the infrastructure field.

I love the way the media blows things way out of proportion. I've met Mark Wiseman. He's a nice guy but the only "comparative advantage" CPPIB has is deep pockets. TPG is partnering up with them because they see them as a "perpetual funding machine", to borrow an expression used by one of the private equity guys I used to work with.

Let me put it more crudely. A senior portfolio manager in public markets once told me "when you're writing $100 or $200 million tickets to private funds, they all want to blow you."

So while the media is all enamored by CPP's private equity prowess, the reality is that when you're as big as they are, you can easily co-invest with the TPGs of this world, reducing your fees and gaining big exposure to some of the better funds out there.

I don't get impressed by flashy news articles. I'd rather see these guys put their heads down, do their jobs and leave the chest pounding theatrics to Céline Dion. At the end of the day, show us your cash on cash returns from all these big private equity deals. And more importantly, make sure you show us the benchmarks you're using to get compensated for all this "alpha" you're producing.

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